Realty Income Corporation (O - Free Report) recently closed the first tranche of the previously-announced transaction with CIM Real Estate Finance Trust, Inc. (“CMFT”) by acquiring 411 properties for $1.035 billion.
The transaction marks a major move to boost Realty Income’s portfolio. The acquisitions of the residual properties are likely to take place in late 2019 and/or early 2020 for roughly $207 million, subject to closing norms.
Announced this September, the total portfolio transaction involves acquisition of 454 single-tenant retail properties from CIM Real Estate Finance Trust, Inc. for around $1.25 billion. The buyout of these single-tenant retail properties, with approximately 5.1 million leasable square feet, will add to the company’s scale and offer a competitive edge in its net lease industry. Leased to more than 55 different tenants across 20 industries, this portfolio reaps 58% of total rental revenues from investment-grade rated companies or their subsidiaries.
According to the company’s earlier press release, the portfolio’s top 10 tenants generate 66.2% of the total portfolio rent. The roster includes names like Dollar General (DG - Free Report) (generates 15.8% of the total portfolio rent), Walgreens (14.8%) and Dollar Tree / Family Dollar (8.7%) among others.
Moreover, Realty Income expects the total portfolio transaction to be executed at approximately 7% cash cap rate. This will lead to an investment spread relative to its first-year weighted average cost of capital, well exceeding the company's historical average.
The company also expects to assume the existing mortgage debt, aggregating around $131 million, on completion of the buyout, at a weighted average interest rate of 4.5%, and a weighted average remaining term to maturity of roughly five years.
Notably, solid property acquisitions volume at decent investment spreads keep supporting Realty Income’s performance. The company has invested approximately $2 billion in high quality real estate during the first nine months of 2019, including the conclusion of its first-ever international real estate investment in the U.K. In addition, considering the tenant and industry concentrations, the company does not expect the latest acquisition to have a considerable impact on its existing tenant and industry concentrations on completion.
In fact, at a time, when rapid shift toward e-retailing, store closures and retailer bankruptcies have emerged as pressing concerns for retail landlords, including Macerich Company (MAC - Free Report) and Taubman Centers, Inc. (TCO - Free Report) , Realty Income has been able to differentiate itself by deriving more than 90% of the company’s annualized retail rental revenues from tenants with a service, non-discretionary, and/or low price point component to their business. Such businesses are less susceptible to economic recessions as well as competition from Internet retailing.
Realty Income currently carries a Zacks Rank #3 (Hold). In the past six months, shares of the company have outperformed the industry. While the stock has appreciated 4.1%, the industry has rallied 1.8% during this period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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